OFT confirms it intends to probe protection policies

Increasing concerns about the way mortgage payment protection insurance (MPPI) is sold caused the Office of Fair Trading (OFT) to announce an investigation this week – and to confirm it is probing sales of payment protection insurance (PPI).

Both forms of cover can prove valuable if, for example, an accident prevents you working and paying off debts but there are fears that many policies are too expensive, partly because of commission paid to salesmen.

The referral to the Competition Commission could lead to a greater deal of information being given to consumers about both products and make more insurance policies available.

The decision follows a crackdown by the Financial Services Authority which fined GE Capital Bank £610,000 for poor selling practices.

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John Fingleton, OFT chief executive, said: "Our examination of the evidence presented to date gives us reasonable grounds to suspect that there are features of this market which restrict competition to the detriment of consumers."

The OFT said there is some evidence of consumer satisfaction with aspects of the product, but added that overall consumers get a bad deal.

PPI is taken out by individuals who want to cover their debt repayments if they are unable to work due to illness or injury, or if they lose their job, while MPPI is taken out by those looking to cover their mortgage payments against those risks.

The referral has been welcomed by independent financial advisers who say consumers have endured limited products in this market for too long. They recommend income protection instead, describing it as a "far superior product".

Philippa Gee, of independent financial advisers (IFAs) Torquil Clark, admitted income protection was often more expensive than PPI and MPP, and she said consumers should consider PPI and MPPI if they could not afford the alternatives and were faced with having no cover at all.

But she said: "In a perfect world I would go for cash savings and income protection."

One of the issues that has eroded consumer confidence in PPI and MPPI is the number of claims that have been rejected. People understandably feel negative about a product that they have paid for but which does not pay out on a claim.

More than 1.6m people have had claims for various forms of insurance rejected in the past five years, according to research by Prudential.

The findings show that the average failed claim for health, income and life insurance is £26,435, adding up to a total of £43.9bn.

Consumers are advised to check the wording on their policies to ensure they know exactly what they are – and are not – covered for.

Angus Maciver, director of insurance for Prudential, explained: "Suffering from any of the big three – cancer, heart attack and stroke – will feel 'critical' to a consumer. But because of medical advances and the fact that diseases are diagnosed much earlier these days – often at the point of diagnosis a customer's condition might not be critical enough to trigger a payout from a traditional policy."

Kevin Carr at specialist brokers LifeSearch said: "Choosing the right product goes back to understanding what is covered."

Checking the points raised in our list of bullet points against your own policy can help determine whether you have the right product.

Mr Carr said the most important check to make is how your policy defines being unable to work. The definition policyholders should look for is "own occupation", which means they are covered if they cannot do their own job. This is in contrast to the "any occupation" definition, which means being unable to do any type of work.

Not everyone in the industry has welcomed the OFT referral. The Council of Mortgage Lenders is disappointed at the decision to include MPPI.

Michael Coogan, CML director general, said: "MPPI is a vital safety net for many households and this referral sends out the wrong message to consumers."

The Post Office, which launched its Lifestyle Protection product in June last year, has been calling for an open market for PPI sales. The product covers policyholders for up to 12 months if they cannot work due to accident, sickness or unemployement. It covers back and stress-related illnesses and is one price for all regardless of age, sex, health and occupation.

Claire Oldstein, of the Post Office, said: "Many customers have little understanding of PPI and some do not even realise they have this insurance in force. Others, who have been at the receiving end of aggressive sales tactics, can feel they have no choice but to take the expensive policy tied to a loan or credit card if they want their application to be accepted.

"If we want customers to trust our industry, these aggressive sales tactics must cease. We must have a more transparent and fairer marketplace."

Questions to ask before signing up

What is the definition of work? Typically, "any occupation" on a PPI or MPPI policy means policyholders must be unable to do any form of work to claim. So if you could still stack shelves the policy would not pay out. With income protection, "own occupation" means that claims will be paid if the policyholder is unable to their own job.

What are the benefit limits? With PPI and MPPI policies, this tends to be linked to the monthly loan or debt repayment amount. With income protection it is typically up to 65 per cent of gross salary or £12,500 a year for non-earners such as housewives.

What are pre-existing conditions? PPI and MPPI policies renew yearly, so conditions suffered after the policy is taken out become pre-existing conditions, which are often excluded. With income protection, these are underwritten and priced accordingly.

What are the premiums and policy terms? PPI and MPPI policies are usually subject to 30 days' notice while with income protection, it is fixed for the duration of the policy.

What are the common exclusions? These include back and stress for PPI and MPPI while there are none as standard on income protection.

What is the waiting period before benefit payments can start? Typically 30 or 60 days for PPI and MPPI while it is optional from one day to two years for income protection.